Drug Benefit Managers Plan Merger

By REED ABELSON and MICHAEL J. DE LA MERCED

Published: July 22, 2011

Two of the nation's largest pharmacy benefit managers, Express Scripts and Medco Health Solutions, said on Thursday that they wanted to combine forces in a $29.1 billion merger that would account for about four of every 10 prescription claims in the country.

If federal regulators and the companies' shareholders approve the deal, the merger would create a company with more than $100 billion in annual revenue. Analysts say the deal could fundamentally change the dynamics of the market for overseeing prescription drug use for health plans and employers, but they predicted that the merger would face the thorny issues of antitrust that have swirled around other ventures involving pharmacy benefit managers.

In announcing the proposed deal, the companies emphasized what they said would be significant savings in drug costs. ''The cost and quality of health care is a great concern to all Americans,'' said George Paz, chairman and chief executive of Express Scripts, in the company's release. ''This is the right deal at the right time for the right reasons.''

Under the proposed agreement, Express Scripts will own 59 percent of the new company, and Mr. Paz will retain both his titles.

While he played down the advantages the combined company would have because of its size, Mr. Paz said the two companies offered complementary approaches to managing patients' drug benefits.

Express Scripts has specialized in understanding patients' behavior and why they may not take their medicines, while Medco has emphasized clinical expertise to determine which medicines work best. ''We're going to take a lot of costs out of health care,'' Mr. Paz said in a telephone interview.

But analysts, who expressed surprise at the deal, predicted strong opposition to the merger, which would leave the industry with just one other independent company, CVS Caremark, itself the product of a $27 billion merger four years ago. ''I think it's going to be a very tough fight through the Federal Trade Commission,'' said Adam J. Fein, an industry consultant in Philadelphia.

While about 60 companies now compete, he estimates that the combined company might have had 40 percent of the market last year, compared to about 16 percent for CVS Caremark. He said both pharmacists and drug makers were likely to try to block the deal.

''I think this poses very serious antitrust concerns,'' said David Balto, an antitrust lawyer who used to work for the F.T.C. and now represents community pharmacists. Consumer groups have already raised concerns with the commission over whether CVS Caremark, the result of a merger between a large drug store chain and a pharmacy benefit manager, is hurting competition, and regulators are likely to want to prevent the merger if they have similar worries that it will stifle competition, he said.

Regulators are likely to scrutinize the merger for any harmful impact on consumers, said Ankur Kapoor, a partner at the law firm Constantine Cannon who specializes in antitrust matters. ''Three-to-two mergers have historically been quashed by the antitrust agencies.''

But the companies may be able to persuade regulators that the merger will eventually save people money. ''The timing of this deal is strategic,'' he said, given the professed efforts of the Obama administration and others to try to control health care costs.

Analysts and industry experts said the combined company would have more clout with drug makers, making it easier to demand lower prices both for generic and brand-name drugs. ''The question is, Will they pass it on to the buyer or will they keep it for earnings?'' asked Edward A. Kaplan, a benefits consultant with the Segal Company. While two of the smaller benefit managers, UnitedHealth's OptumRX unit and Catalyst Health Solutions, have recently won some contracts, employers and health plans have largely selected one of the three major companies to handle their prescription drug coverage, he said.

The merger could also have an impact on the recent battles with large drug store chains like Walgreens. Last year, Walgreens threatened to stop filling prescriptions for patients in plans offered by CVS Caremark. Walgreens is now in a similar standoff with Express Scripts.

''If this deal were to go through, it's going to raise the stakes for Walgreens,'' said B. Kemp Dolliver, who follows the industry for Avondale Partners in Boston. Mr. Dolliver predicts the parties will settle their differences, because an agreement would be in the interest of both the drug plan and the drug store chain. Walgreens did not return calls seeking comment.

Despite the doubts raised over whether the deal would get the necessary approvals, Mr. Paz emphasized that the two companies were confident they could overcome the necessary regulatory hurdles. ''We wouldn't be doing this if we didn't think we could get it through,'' he said.

While analysts said both companies had been looking for possible acquisitions, they said they had been expecting much smaller deals. But the two companies had informally discussed a potential merger for years, according to people briefed on the matter. Medco finally reached out to Express Scripts about a sale several weeks ago, and the two companies quickly put together the transaction without a heavy amount of due diligence, these people added.

While the agreement does not include a termination fee if regulators block the deal, it does specify that Express Scripts will sell up to a certain amount of assets to help gain approval, they said. The lack of a breakup fee is also meant to reflect anticipation that the merger will pass regulatory scrutiny.

Analysts say Medco executives were under pressure to combine after a series of competitive defeats. Earlier this year, Medco announced it had lost the 2012 contract with the Federal Employees Health Benefits Program, worth $3 billion in annual revenue, to CVS Caremark, after also losing the account with the California Public Employees' Retirement System.

On Thursday, Medco also announced the end of its contract with UnitedHealth, which now plans to manage its drug benefits internally and may prove to be a formidable competitor.

''All of those situations this year sealed their fate,'' said Roy Wilkinson, an industry consultant in Baltimore.

This is a more complete version of the story than the one that appeared in print.